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$vuetify.icons.faPhone1300 650 620

A four-step housing solution

A four-step housing solution

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We have a shortage of homes in Australia. There are four steps governments can take to improve supply and ease the pressure.

Tim Reardon

Chief Economist, HIA

After decades of debate, all political parties and agencies recognise that there is an acute shortage of housing. This is partially due to an underbuild in the previous decades, a shift toward lower density through the pandemic and strong population growth. The shortage of housing stock has reached such an acute level that all tiers of government are focused on addressing the problem. 

When the National Housing Finance and Investment Corporation (NHFIC) released its State of the Nation’s Housing Report 2022-23 in April, it was a significant moment for policymakers. The report’s findings indicate that all levels of government have failed to deliver an adequate supply of homes for Australians. Until then, they failed to recognise the depth of the problem. 

The Australian Government’s goal to build one million homes over the next five years is achievable, but even this volume of new homes won’t resolve the shortage. The challenge for them is how to achieve this laudable goal. The following are four necessary steps to increase the supply of new homes.

The goal to build one million homes over the next five years is achievable, but it won’t be enough to resolve the shortage.

1) Do no harm

When governments make new home construction more expensive, fewer homes are built.

The cost of new home construction has risen sharply due to global factors following the pandemic. From 2023, changes to the National Construction Code will further add to the cost of construction. Regardless of the merits of improving energy efficiency and accessibility in new homes as some of these changes aim to do, they come at a cost. Each additional restriction will slow the supply of new homes and exacerbate the shortage of dwelling stock.

The Victorian Government recently joined Western Australia to delay the introduction of these regulations to ease the burden on industry given the significant challenges in the market. This temporary reprieve will ease the cost pressures in those states. 

In addition to regulatory costs, tax imposts on housing were also announced in the 2023 Victorian Budget. The cost of green fields land has risen faster over the past few years than the cost of construction as the supply failed to meet demand and further added to the cost of a new ‘house and land’ package. Despite this list of additional costs, proposals to add further to the cost of new home construction, or through taxes or rental price caps, continue to be debated. 

To build more housing, of all types, governments need to stop making new homes more expensive. 

To build more housing, of all types, governments need to stop making new homes more expensive.

2) Attract more investment to the sector

In order to build more homes, more investment is required from all buyer types: owner occupiers, investors, foreign investors and government.

In the final quarter of 2022, Australia commenced construction of just 28,590 new detached houses. This would have barely qualified as a good quarter in the 1970s. Multi-unit commencements have also fallen by almost 50 per cent since 2016 following the introduction of a series of new taxes on investors. This is despite a significant increase in the population and rapid overseas migration.

There are few items in our economy that are more heavily taxed than new homes. There is a long list of taxes, fees and charges imposed on new home building from stamp duty through to a ‘temporary levy’ imposed to recover the cost of the HIH collapse in 2001. Governments tax tobacco to impede its consumption, and by taxing new homes, they achieve the outcome of building fewer homes. 

Housing is an important component to the tax base, but the way it is taxed warrants reform as the burden falls disproportionately on new supply. Redirecting this tax base to more efficient, broad-based taxes will ease the burden on those looking to build a new home.

Owner occupiers, especially first home buyers, have also been forced away from ownership by increasingly restrictive lending regulations. These restrictions have been ramped up over the past 15 years despite a lack of evidence that there is a problem with mortgage delinquency in Australia. This has resulted in an unquestionably sound financial sector. It has also reduced competition for lending to first home buyers and those with less than a 20 per cent deposit, further reducing the pool of investment for new home building.

Housing is an important component to the tax base, but the way it is taxed warrants reform as the burden falls disproportionately on new supply.

Perhaps the simplest, and least expensive, option to reduce the tax burden imposed on new homes is to remove the punitive stamp duties imposed on foreign investors. State and federal governments have worked cooperatively to force foreign investors from new home building in Australia. 

Foreign investors cannot buy established homes, they can only build new homes. This cohort of investors is a key component to increasing the supply of new homes and keeping a lid on rental price growth.

Unlike stamp duty imposed on established home purchases, these punitive foreign investor duties have seen investors exit the Australian market, and as a consequence, revenue raised appears to be significantly less than budgeted. 

Changes announced in the 2023 Federal Budget also aim to attract institutional investors, such as superannuation companies, to invest in new home building. This type of ‘build to rent’ project plays an important role in attracting investment in international markets. To date, institutional investment in housing in Australia has not played a significant role.
The Australian and state governments have also announced a suite of investment in new public home building. The timing of the investment is ideal as it will see an increase in activity during 2024/25 when the market has cooled, and governments can ensure a good return on their investment. It will also support relatively stable employment in the sector.

The combined impact of these measures will do little to offset the value of the lost foreign investment since 2016. 

3) Skilled labour, land and manufacturing capacity

The building industry is suffering from a structural and cyclical capacity problem.

Shortages of skilled labour have persisted in hampering the industry for much of the past 20 years. The pandemic added a cyclical component to this problem by denying access to overseas labour and leading to an unprecedented increase in demand for homes. The increase in demand is due to a change in consumer behaviour toward lower density living. 

Supply chain disruptions through the pandemic have added to the cost of construction. Record levels of expenditure by government on infrastructure projects are also absorbing available resources and forcing up prices for materials and labour. 

These problems have developed over a number of years, and it has taken the pandemic, and the acute shortage of housing, to see them under the spotlight. 

The rise in the cash rate will see home building slow and ease some of the labour and material shortages in 2024. A global recession would also add a ‘push factor’, where skilled workers facing unemployment in other economies seek to relocate elsewhere. 

Despite this slowing in demand for labour and materials, the structural problems will remain. 

Attracting investment into building manufacturing capability in Australia requires low and reliable energy costs, a stable business environment and a competitive labour market. Even if stable and reliable policy settings follow, the supply of skilled trades and land improves, and we see improvements in manufacturing productivity, it will be at least a decade before the shortage of homes will rise to meet the underlying demand.

This problem took decades to develop and will take another decade to resolve. The challenge of increasing the supply of homes will take at least a decade to resolve.

The building industry is suffering from a structural and cyclical capacity problem.

4) Coordinated government response

Coordinated action across all tiers of government can ease Australia’s shortage of homes. 

A prime example of the lack of government coordination can be seen in the data surrounding land release. HIA conducted a desktop review of data availability that identified a number of barriers to conducting meaningful analysis of land release. Different states have different processes for providing land release data, and even different names for the various stages of land supply. Although data coverage for the capital cities is generally acceptable, it is sporadic to non-existent for regional areas. If you can’t accurately measure it, it doesn’t exist.

There is also a prime role for the Australian Government to assist state and local councils, with quality data and more advanced methodologies for forecasting future housing demand. State government forecasts are built upon population data from the Australian Government, which is rarely accurate, and at best, highly lagged. With better data, performance benchmarking of each local council and state government to deliver an adequate supply of land and homes can be undertaken regularly.

Perhaps, this would be assisted if each state had a Department of Housing with a consistent mandate to increase the supply of housing. Not only will this ensure a concerted effort is made to improve housing supply, but it will go some way to ensuring there is an advocate within government to prevent additional costs being imposed on new homes.

The Bill we need

A healthy housing market is one with around five per cent rental vacancy, which is significantly higher than the rental vacancies of less than two per cent that can be seen across most cities in Australia. 

When rental vacancies rise to five per cent, rent price growth slows, house price growth will stabilise and the pressure on public housing stock eases. 

The Housing Australia’s Future Fund Bill 2023 that failed to pass Parliament at the last sitting aims to address the affordability problem. It is not in itself a solution to every challenge we face, but if passed, it will improve the quality of housing data, coordination across state and local governments and increase investment in public housing. These are necessary steps to address the supply shortage in the long term.

Even if all these initiatives are adopted and the industry were to commence construction of new homes ‘at capacity’, it will take many years to catch up on the growth in demand for new homes. Through these years, the industry will need to remain vigilant to defend measures that will add further to the cost of construction.

First published on 7 August 2023

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